Photo: Richard Drew / AP Photo
A portfolio manager (who wishes to remain anonymous) made $27,000 when the earthquake and tsunami struck Japan the weekend of March 11th.He told us how he did it.
“I was awake when the earthquake hit early Friday morning and I immediately put on 3 macro shorts and one long, in gold. There’s always a flight to a safety like gold whenthere’s a shock to the markets,” he says.
His first two shorts were on 50 S&Ps at $1295 and 12 30-year Treasury bonds at $1208.
“Of course normally, you’d go short one and long the other because in normal markets, there’s an inverse relationship” between equities and fixed income (or stocks and bonds).
Usually, for example, if 30-year Treasury bonds rose in price, you would expect S&P500 contracts to drop, because there’s risk associated with the stock market and safety associated with bonds.
But that Friday, “I knew that both the S&P and bonds would trend in the same direction, down.”
“I was in Japan when Kobe hit. So I knew the market would expect the same effect on bonds.” After Kobe in 1995, Japanese firms repatriated (bought) yen because thegovernment was pouring money into rebuilding efforts.
“So the market was going to expect a repatriation, and Japan is a large holder of U.S.Treasuries (Japan is the second largest holder, first is China), so if money is flowing into the yen, it’s probably flowing out of U.S. Treasuries.”
Next, “a trader would short crude whenever a huge importer, like Japan, is facing a slowdown,” he explains.
“Look at the U.S., another huge importer of crude. In 2008 during the recession, crude imports slowed.”
So his third short was in crude oil. “I phased in shorts when crude hit $100.50.”
A few hours later on Friday, his trades were down $14,000, “probably because the markets hadn’t swallowed what was going on.”
He stayed in despite the losses. 90 six hours later, only his 30-year Treasury bond shortwas down $5,000. The S&P short made $10,000, the crude oil short made $7,000 and he’d made $15,000 going long gold.
Total profit: $27,000.